Tuesday, 2 June 2009

In looking through Claymore Canada's website, one comes across the curious fact that there seem to be two sets of numbers for the management expenses of the various ETFs.

The first number is the one visible on the website's description for each fund, e.g. the Canadian Fundamental Value Index Fund (TSX: CRQ) says the fund's "Management Fees" are 0.65%. (The other fundamental equity index funds - International, US and Japan have the same annual fee.)

The second number appears on page 19 in the Prospectus. CRQ in 2008 had a "Management Expense Ratio" (MER) of 0.70% in 2008 and 0.69% in 2007.

The difference between the Management Fee and the MER is not directly explained but it seems to be that the MER also includes other costs (i.e. MER = Management Fee + Other Expenses). Page 18 of the Prospectus says such expenses come directly out of the fund and they include: "... expenses related to the implementation and on-going operation of an independent review committee under NI 81-107, brokerage expenses and commissions, income taxes and withholding taxes, transaction costs incurred by the Custodian and extraordinary expenses."

Maybe there is a cap on fees to limit what comes out of the fund, which is what it actually costs a Claymore investor, but I could not find this stated anywhere in the Prospectus. It is the MER that counts to the investor and Claymore should post the MER front and center on the ETF's webpage. Better yet, they should do as iShares does (see the iShares Prospectus e.g. page 23 last paragraph) and simply cap the fees.

International (TSX: CIE) - 2008 MER 0.56% ... but Claymore charges 0.65%? Huh? How can it be that the investor pays less than the Management Fee charged, which doesn't even include all expenses?

It doesn't seem to be a typo since the 2007 MER was 0.53%. Maybe it is due to the use of derivatives to substitute for directly investing in the 1000 companies of the target index. The fund is tiny at about $51 million in assets so could not hope to buy 1000 different stocks. Maybe it has to do with the fact that the two main holdings of CIE are the Claymore Japan and Canada ETFs. Dunno, any theories would be welcome.

Update ... on page 36 of the Prospectus, Claymore says that when funds like CIE hold other Claymore ETFs within them, it is bound by securities regulations not charge management fees twice. If they excluded the fees charged within the Japan and Canada funds - about a quarter of the holdings - from the calculation of CIE's expenses, that would lower CIE's fees by about a quarter. Adding back that missing quarter (0.56%/0.75 = 0.74%) would bring CIE's MER up to around the same level as the other funds.

Sorry for the comment spam. My understanding is MER = Management Fee + Operating Expenses. Operating Expenses does not include brokerage expenses and commissions, income taxes and withholding taxes etc.

Som's explanation was that Claymore's "Management Fees" includes operating expenses (at least for CGL.UN). If the wording is the same for other ETFs, it begs the question: why is the reported MER different from advertised "management fees". I think I'll write on this as well.

Now I'm thoroughly confused. The wording on the other ETFs is exactly the same as CGL.UN. In Claymore's parlance, Management Fee = MER. i.e. Claymore is responsible for all operating expenses other than the management fee.

So far, so good. But I don't know why reported MER is somewhat different from the MER is the prospectus. The mystery deepens...

Maybe the securities regulators need to establish a formal definition of what MER means. As FourP points out, mutual funds had to disclose their other expenses and now it seems they just include it all in the MER as this quote from the Investment Funds Institute of Canada (the mutual fund company association) says: "Management fees comprise approximately 40 percent of the total MER, while the dealer advisor compensation comprises another 40 percent. The fund company’s administrative costs--including legal and accounting fees, brokerage fees and interest expenses--as well as GST costs comprise the remaining 20 percent of MER fees."

Maybe we bloggers should create a few new terms, like the AER (Aggravation Expense Ratio) or the OER (Obfuscation Expense Ratio)